bebe Fashions a Double

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By LouAnn Lofton (TMF Lou2)
January 11, 2001

bebe Stores, Inc.

Ticker: (Nasdaq: BEBE)
Phone: (415) 715-3900
Website: http://www.bebe.com/
Price (1/10/01): $24

How Did It Double?

bebe and its super-short skirts and tiny little suits were made famous, in part, by that annoyingly lithe TV-attorney Ally McBeal. bebe made Ally's suits, and Ally made it OK for professional women to wear skirts so short they could hardly sit down in them. And Ally was still taken seriously. Well, sort of. Regardless, bebe's popularity sky-rocketed, and every mom, businesswoman, and yours truly went out and grabbed up some cute little suits from bebe, which I own shares of, by the way. That was before last year, though.

You see, in addition to selling suits, bebe also sells flashier, trendier items -- things like amazingly low-cut tight shirts, and hip-hugging pants of all manner. I tend to refer to these as "going-out clothes," but some have called them "hootchie-wear," or even the more honest "love clothes." I think you get what I'm saying.

Anyway, bebe's focus shifted over the last year away from suits to those eye-popping, attention-getting clothes. Customers weren't happy, and it was reflected in worsening same-store sales growth and inventory bloating.

When I wrote about bebe's fourth-quarter results back at the end of July, I noted that bebe's founder, chairman and CEO Manny Mashouf, owned up to bebe's merchandising problems. He flat-out admitted that bebe lost sight of what its customers wanted. bebe tripped over its own stiletto-clad feet.

The company also flubbed its advertising during that quarter, substituting its usual real-life voluptuous models for bizarrely drawn multi-colored-hair illustration models. bebe nixed those and went back to the tried-and-true alluring bebe models for the fall.

This is all to say that bebe slowly began losing touch with its core customers throughout much of the first half of the calendar year. It started finding its way back in the second half, and as a result, the stock responded, beginning a climb in October from under $10 a share to the company's current levels in the mid-$20s. bebe's 52-week low, reached on June 13, was $6.88 a share.

bebe began stocking more suits, and customers started responding. bebe also brought in a new president and COO, John Parros, in November. For the company's fiscal first quarter, which ended September 30, it actually managed to beat analysts' estimates by four cents. bebe was expected to earn $0.19 a share, and it pulled off $0.23, though that is still below last year's $0.30 a share. Still, it instilled some confidence that the company was starting to get things right again. 

Business Description

Investors biding time in Washington, D.C.'s bus shelters may, from time to time, find themselves looking eye-to-eye with a forbiddingly attractive -- but well-dressed -- woman staring at them from a poster advertisement for bebe. A sexy, stylish, fashion-forward image is cultivated by bebe, which designs and develops clothes that are then marketed in its chain of about 120 stores. Bebe's clothes are branded under the bebe, bebe moda, and bbsp brands.

"Our target customers are 18- to 35-year-old women who seek current fashion trends interpreted to suit their lifestyle needs," reads the company's latest 10-K report. "The 'bebe look,' with an unmistakable hint of sensuality, appeals to a hip, sophisticated, body-conscious woman who takes pride in her appearance." bebe sells watches, swimsuits, accessories, eyewear, and shoes as well as its signature suits, and other clothes.

Financial Facts

Income Statement  
12-month sales: $247.1 million
12-month income: $7.7 million
12-month EPS: $1.10
Profit Margin: 11.2%
Market Cap: $590.4 million

Balance Sheet (as of September 30, 2000)
Cash: $72.5 million
Current Assets: $106.6 million  
Current Liabilities: $25 million
Long-term Debt: $0

Ratios
Price-to-earnings: 21.8
Price-to-sales: 2.39

How Could You Have Found This Double?

bebe's quiet little double could have been found a couple of ways. By paying attention to what the company said when it announced fourth-quarter earnings at the end of July, investors could have prepared themselves to monitor bebe's attempt to re-focus its merchandise. bebe was honest about its mistakes then, and has started making real progress since.

bebe's same-store sales (or "comps") also were a clue for investors. They started firming up around October. In October, bebe's comps were negative 3.4%. In November, bebe actually had positive comps for the first time since February 2000, with a comps increase of 1.7%. December's comps were off 1.8%, but some analysts had expected bebe's comps for December to be off by as much as 4%, so that was a pleasant surprise. Also pleasantly surprising was bebe's estimate-beating first-quarter (ended September 30) results. Those could have been another clue that bebe was straightening itself up.

Where to From Here?

Fashionable retailing is a tough business, as bebe's performance over the last year has demonstrated. A couple of wrong merchandising choices can ground your company for months. bebe appears to be working the kinks out of its mistakes, though, and is listening to its customers and what they want more.

The company reports fiscal second-quarter (ended in December) results on Jan. 18. The consensus estimate for bebe calls for $0.46 a share. When bebe announces these results, we'll have even greater insight into just how well and how strongly the company is making a come-back.

More important than meeting or beating estimates, in my opinion, will be bebe's inventory management. The company's Foolish Flow Ratio has been out of whack for some time now, and while I'm not claiming that bebe is a Rule Maker, that number is still a useful measure for how tightly a company controls its inventory. With a company like bebe that must stay on top of trends, and keep its mix fresh -- but not too fresh -- good inventory management is vital. bebe's flowie will hopefully be closer to the 1.25 level we like than it has been in recent quarters.

bebe's comps aren't out of the woods, yet, either. There are some easy comparisons to work off of now, with nearly a full-year of negative comps (except for February) behind it. Still, it's going to be important for bebe to keep its customers coming back in the future, and comps will be one way to measure this. While it appears that bebe has taken the first tottering steps back to success, it remains to be seen if the company can keep its balance.

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